Congress and the Federal Estate Tax

There has been much speculation in the past year as to whether Congress would act to provide some clarity on the federal estate tax. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) affected a number of areas dealing with tax, including estate, gift, and generation-skipping transfer taxes, among many others. Pursuant to EGTRRA, the tax exemption amount would increase from $675,000 in the year 2001, to $1,000,000 in the years 2002 and 2003, to $1,500,000 in the years 2004 and 2005, to $2,000,000 in the years 2006, 2007, and 2008, and $3,500,000 in the year 2009, until the year 2010, when the federal estate tax would be repealed for that year and reinstated with a tax exemption amount of $1,000,000 in the year 2011, unless Congress acted before then. It becomes difficult for some to engage in any long-term planning when the tax law changes every year.

As of this writing, in December of 2009, the unified tax credit exemption amount is $3,500,000 and taxes would have to be paid on anything over that amount if a person dies this year. If a person dies in 2010, their beneficiaries will not have to pay any taxes on the deceased’s estate. In 2011, the unified tax credit exemption amount goes back to $1,000,000, and estate taxes will be due on estates worth more than $1,000,000 dollars.

On December 3, 2009, the House of Representatives passed H.R.4154 – Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009. This Act repeals provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, eliminating the tax on estates and generation-skipping transfers and the step-up in basis provisions for property acquired from a decedent for estates of decedents dying after 2009. The estate and gift tax provisions in effect in 2009 would be retained. It also amends the Internal Revenue Code to establish a permanent exclusion amount of $3,500,000, and a maximum tax rate of 45% for decedents dying, and gifts made, after December 31, 2009. (The gift tax exemption amount would remain at $1,000,000.) Under H.R.4154, only a small percentage of Americans would need to be concerned with paying federal estate tax. Although the Senate has yet to vote, the passage of this bill by the House of Representatives is a step toward clearing up some of the uncertainty surrounding estate and gift taxes.

Mentioned earlier, an issue with which to be concerned is the elimination of the step-up basis at death under The Economic Growth and Tax Relief Reconciliation Act of 2001, which will be the subject of my next post.

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